Organizational Economics of Physician Practices

Innovation and Economic Growth

Article Snapshot


James B. Rebitzer and Mark E. Votruba


NBER Working Paper #17535, 2011


This paper reviews organizational economics theory and applies it to the problem of improving health care efficiency.

Policy Relevance

Integrating physicians into large health care organizations is a likely way to lower the cost of health care while improving outcomes, but numerous legal, social, and economic features of health care interact to make successful organization design difficult.

Main Points

  • Health care in the United States is expensive and delivers poor outcomes.

  • One explanation is that health care organizations and physicians are fragmented, and coordinate poorly.  However, economists often cite physician incentives as a problem, noting that doctors are often paid more for delivering expensive but suboptimal treatments.

  • Although doctors have become more integrated in their non-medical activities, clinical activities remain fragmented and uncoordinated.

    • Physician hiring takes place in a complex legal, economic, and social environment that seems to inhibit economic mechanisms that would usually lead to efficient competition.  This prevents the development of health care organizations that deploy physicians effectively at low costs.

    • This is particularly unfortunate because it may be difficult to overcome physician incentive problems outside of health care organizations.
  • Affordable Care Organizations (ACOs) were created as part of the 2010 Affordable Care Act; they are networks of hospitals that provide care to large blocs of Medicare patients.  ACOs may be effective in increasing care quality or lowering costs but face many of the organizational challenges present elsewhere in the medical system.

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